Uncertainty Index

Small Business Uncertainty Plunges in December

NFIB’s new Uncertainty Index from the Small Business Economic Trends Survey

Uncertainty is a significant barrier to economic growth in the small-business sector. Uncertainty limits the ability of small-business owners to pursue investment opportunities in their business. NFIB’s 2016 Small Business Problems and Priorities survey found that two of the top ten most severe problems affecting small-business owners are uncertainty related. Uncertainty over economic conditions and uncertainty over government actions are ranked fourth and sixth out of 75 business problems. About one-quarter of small business owners find each a “critical” problem in operating their business.

What is “uncertainty”? Basically it is the inability to anticipate the outcomes of important future events which are critical to planning and forecasting for the firm. The rising level of discomfort is apparent in NFIB’s Uncertainty Index, which is created from responses to six questions from the monthly Small Business Economic Trends survey. The Index is based on the frequency of “don’t know” and “uncertain” responses over these six questions (see Appendix).

The Uncertainty Index fell 15 points in December after reaching a 42 year record high level in November. More small-business owners could directionally anticipate future events or conditions. The Index component “General Business Conditions” and “Capital Expenditure Plans” were the main contributors pushing the Index lower with more respondents moving from “don’t know” to “better” or “increase”. Uncertainty is still at a historically high level, but easing.

The post-election November SBET survey found that 45 percent of the owners said that the current environment was a bad time to expand their businesses substantially, down 6 points from the 51 percent reporting the same before the election. Post-election, 27 percent blamed the “political climate” for their negative expansion views compared to 41 percent who responded before November 8th. Clearly resolving this uncertainty is important to owners planning the future course of their firms spending and hiring.

Doing nothing, of course, is a decision, but one that involves taking no action versus hiring new employees to handle an expected increase in sales or reducing the workforce in anticipation of a decline. Having firm views about the future is important for economic growth as owners “bet” on their convictions, depending on the “firmness” with which they are held. “Uncertain” or “don’t know” are not solid decision making views, preventing owners from deploying resources in defense of expected trouble or expending resources to take advantage of coming improvement in sales or other opportunities. In short, heightened uncertainty prevents market participants from taking proactive steps to deal with future developments.